OxfordAQA International AS and A-level Economics: Demand for and supply of labour (9640) – Revision Notes

These notes are for the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, sections 3.3.4.1 (demand for labour, marginal productivity theory) and 3.3.4.2 (supply of labour to different labour markets). Section 3.3 is extra International A2 content. All figures are invented and illustrative. For full explanations, start with the study guide, then try the practice questions. Course pages: OxfordAQA A-level Economics hub and checklist. Check where you stand with a free 10-minute diagnostic.

Key definitions

Term	Meaning
Derived demand	Demand for workers that is passed back from customers’ demand for the output
Marginal physical product (MPP)	Rise in total output from adding one worker, equipment unchanged
Marginal revenue product (MRP)	Revenue added by hiring one more worker; equals MPP × MR
Demand curve for labour	Links each wage to the number of workers firms want to hire
Supply curve of labour (to an occupation)	Links each wage to how many people will take jobs in that occupation
Monetary considerations	Wage, overtime, bonuses, pension and other pay-related benefits
Non-monetary considerations	Hours, conditions, security, status, satisfaction, location, training and promotion

Formulas

Measure	Formula
MPP	Change in total output ÷ change in workers
MRP	MPP × MR (equals MPP × price for a price taker)
Hiring rule	Employ while MRP is at least the extra cost of the worker (the wage)
PEDL	% change in employment ÷ % change in wage
Elasticity of supply of labour	Proportionate rise in the willing workforce ÷ proportionate rise in pay
Wage bill	Wage rate × number employed

Method: finding how many workers a firm hires

1. Work out MPP: the difference between successive totals of output.
2. Multiply by MR (the price if the firm is a price taker) to get MRP.
3. Set each MRP against the wage.
4. Count workers up to the last one whose MRP is at least the wage. Stop at the first one below it.
5. Repeat at other wages to build the demand schedule.

Worked reminder (a small bakery, invented). Loaves sell at 3.00. Total daily output with 1 to 5 bakers is 30, 54, 72, 84 and 90.

Bakers	Output	MPP	MRP at 3.00
1	30	30	90
2	54	24	72
3	72	18	54
4	84	12	36
5	90	6	18

At a daily wage of 40, the third baker adds 54 and costs 40, but the fourth adds only 36, so the bakery hires 3. At a wage of 60 it hires 2. If the loaf price falls to 2.00, the MRP column becomes 60, 48, 36, 24 and 12. At a wage of 40 it now hires 2: the demand curve has shifted left.

Derived demand and the shape of the curve

• The curve slopes down because MPP falls (diminishing marginal returns). With a falling product price, MR also falls.
• A wage change slides you along the curve rather than moving it.
• Link: if product demand rises, MR rises, MRP rises, and the demand curve for labour shifts right.

Limits of marginal productivity theory: hard to measure MPP in teams or where output has no market price; assumes identical workers and profit-maximising firms; assumes firms know MRP; strongest in the short run.

If the firm has market power in its product market: it must lower the price to sell more, so MR is below the price. A worker with MPP of 10 units, where the price is 5.00 but MR is 3.50, has MRP = 10 × 3.50 = 35, not 50. Using the price would overstate how many workers the firm hires.

Chain of reasoning for a rise in product demand: more sales, higher price or output, higher MR, higher MRP at each wage, firms hire more at the same wage, and the demand curve shifts right. Labour demand moves because product demand moves.

Causes of shifts in labour demand

Shifts right	Shifts left
Higher demand for the product or higher price	Lower demand for the product or lower price
Higher productivity (training, complementary technology)	Cheaper substitutes such as machines replace workers
Cheaper complements	Higher non-wage costs for employers

Elasticity of demand for labour

Worked reminder (a cleaning contractor, invented). The wage rises from 9.00 to 9.90, a 10% rise.

Case	Employment	% change	PEDL	Wage bill
Inelastic	500 to 470	−6%	−0.6	4,500 to 4,653 (up 3.4%)
Elastic	500 to 425	−15%	−1.5	4,500 to 4,207.50 (down 6.5%)

Determinants (more elastic if…):

• Labour is a large share of total costs.
• Substitutes (capital or other workers) are easy to find.
• The product has elastic demand, so a price rise cuts sales sharply.
• More time has passed since the wage change.

Evaluation points. The size of PEDL matters for the effect on the wage bill. It also matters for how many jobs are lost if costs rise. The result depends on time and on whether technology replaces labour or helps it.

Supply of labour to an occupation

• The supply curve slopes up because a higher wage attracts workers from other occupations and from outside the labour force.
• Workers compare the whole package of monetary and non-monetary rewards. A job with unpleasant conditions may need a higher wage to attract the same numbers.
• Individual choices about hours and the backward-bending curve are outside the specification for this topic.

Worked reminder. A 5% wage rise (20 to 21) in an invented occupation raises the number willing to work from 800 to 824, which is 3%. Elasticity = 3 ÷ 5 = 0.6 (inelastic).

More elastic supply: low skill and training barriers, high mobility, unemployed workers available, longer time. Less elastic supply: long training, specific qualifications, licensing, low mobility, short run.

Causes of shifts in labour supply

Reasoning chain for a shift: if pay in a rival occupation rises, some workers move there. The occupation then has fewer workers willing at every wage, so its supply curve shifts left. The same chain works in reverse when conditions in the occupation improve.

Shifts right (more willing at each wage)	Shifts left
Lower wages elsewhere	Higher wages in rival occupations
Better working conditions or hours	Worse conditions
More qualified people (training, immigration, demographics)	Emigration or retirement without replacement
Lower barriers to entry	New licensing or qualification barriers

Must-know distinctions

• Movement along or shift? Wage change: movement along. Any other factor: shift.
• MPP or MRP? MPP counts units of output. MRP counts money.
• Demand for or supply of labour? Firms demand and workers supply. A wage rise in the firm’s own industry moves along the demand curve, but a wage rise in a rival occupation shifts supply.
• Price or MR? In a competitive product market they are equal. Otherwise MR is lower.

Quick self-test

1. What is meant by derived demand?
2. A firm’s total output rises from 84 to 96 units when it hires its fifth worker. What is that worker’s MPP?
3. The fifth worker’s output sells at 2.50 per unit with a constant price. Calculate the MRP.
4. The wage is 28. Should the firm hire the worker in question 3?
5. State one cause of a rightward shift in the demand for labour.
6. Employment falls by 4% after a 10% wage rise. Calculate PEDL.
7. Is the demand in question 6 elastic or inelastic? What happens to the wage bill?
8. Give two determinants of elasticity of demand for labour.
9. Name two non-monetary factors influencing the supply of labour to an occupation.
10. Explain one reason supply of specialist engineers is inelastic.
11. A new licence requirement is introduced for an occupation. What happens to supply?

Answers

1. Demand for labour that arises from the demand for the product it makes.
2. 96 − 84 = 12 units.
3. 12 × 2.50 = 30.
4. Yes. MRP of 30 is above the wage of 28, so it adds more to revenue than to cost.
5. Higher demand for the product, higher productivity, or a cheaper complement (any one).
6. −4 ÷ 10 = −0.4.
7. Inelastic. The wage bill rises, because the wage rises by more than employment falls.
8. Any two from: labour share of costs, ease of substitution, elasticity of demand for the product, time.
9. Any two from: hours, conditions, job security, status, satisfaction, location, promotion prospects.
10. Long training and specific qualifications mean few workers can enter quickly, so the numbers willing barely respond to a wage change.
11. Supply shifts left, because entry is harder.

Where marks are usually lost

• Calling a wage change a shift of the curve.
• Dividing by the wrong base when working out a percentage change.
• Using the price in place of MR when the firm has market power.
• Saying a firm hires while MPP is positive, rather than comparing MRP with the wage.
• Describing elasticity without saying which way the wage bill moves.
• Giving determinants as a list without explaining the chain from wage to cost to output to jobs.
• Treating supply of labour as only about pay, leaving out non-monetary factors.
• Giving a one-sided answer to an evaluation question, with no judgement about time period or the market in question.

Official syllabus

OxfordAQA International AS and A-level Economics (9640), specification version 1.2, first teaching September 2020, published by OxfordAQA. See sections 3.3.4.1 and 3.3.4.2, and the quantitative skills in section 3.5.